A British company that uses a genetically modified compost-heap bug to produce biofuel from rubbish has signed a $500m (£319m) contract with a US firm.

TMO Renewables developed a strain of “turbo-charged” bacteria that can turn tea bags, cardboard, wood and other household waste into fuel for cars and trucks. The Guildford-based company signed a 20-year, $25m-a-year deal with US firm Fiberight.

The technology is part of a wave of “second generation” biofuels that are not made from crop plants. The use of rubbish is aimed at addressing concerns that growing plants for fuel will raise food prices.

“With TMO’s bacteria on board, which speeds up the breakdown of cellulose in the waste, the efficiency with which we convert rubbish into bioethanol will rise by around 35%,” said Craig Stuart-Paul, chief executive of Iowa-based Fiberight. “[TMO Renewables] is three to five years ahead of most of its competition in the US.”

In 2008, TMO Renewables built the UK’s first bioethanol plant that runs on grasses, cardboard and other waste. Key to its success was the incorporation of genetically engineered bacteria that can break down cellulose into simpler sugars, which can then be fermented to produce bioethanol. The TMO process relies on a strain of bacteria known as TM242 which grows at high temperatures of around 60C. “It has an unusually broad appetite, such that Fiberight’s process will be able to turn waste into bioethanol is just 24 hours,” said Hamish Curran, CEO of TMO Renewables. The Fiberight deal is TMO’s first commercial contract.

“We can finally roll out a technology that will truly break the mould of fuel generation. It’s going to reduce how much garbage ends up in landfill generating methane, and provide extremely sustainable transport fuels,” he added. In the next five years, 15 plants using TMO’s process will be built.

Stuart-Paul said the potential market in the US is considerable. By 2011, US legislation calls for 17.1m gallons of bioethanol to be used in cars. “We’re going to be making 50% of that,” he said.According to Curran, developing TMO’s process in the US rather than in the UK was a logical and commercially attractive proposition. “The US government is substantially ahead of Europe, and in particular the UK when it comes to making biofuel companies feel welcome. The debate the UK had last week about scaling back biofuel production is just another example of this.”

Claire Wenner, head of biomass and transport at the Renewable Energy Association in London, agrees. “It’s just so sad that we are losing these companies to the US,” she said. “Why aren’t we building these plants in the UK? Sustainable development in the UK keeps getting knocked back by skittish politicians. We just need to go for it, like the US is.”

Next up, TMO hopes to partner with companies in China. “Shanghai has 20 million people and Beijing has 19 million so there’s an awful lot of waste that’s ready to be turned into bioethanol. What’s more, there’s not much room in China for landfills and China’s biofuel mandates are more advanced than they are in Europe, so yes we’re interested.”